Nexen Seen Securing Deal After Canada Rebuffs Progress

Even as the Canadian government
reminds foreign acquirers of its power to quash takeovers,
investors are still better off wagering on a deal for Calgary-
based oil-and-gas explorer Nexen Inc. (NXY)

Canada last week rebuffed a bid by Malaysia’s state-owned
oil company for Calgary-based Progress Energy Resources Corp.,
raising concern that Nexen’s planned purchase by Cnooc Ltd. (883) of
China may suffer the same fate. After Nexen’s shares dropped
more than 6 percent on the news, the stock traded at its biggest
discount to the takeover offer since the $15.1 billion deal was
announced in July, according to data compiled by Bloomberg.

The Nexen deal hinges in part on China’s willingness to
approve Canadian investments there, a person with knowledge of
the matter said this week, and Taylor Asset Management Inc. and
Veritas Investment Research Corp. say Canada will likely allow
it to proceed. Even if the government scuttles Cnooc’s purchase,
that won’t stop major energy companies such as Royal Dutch Shell
Plc (RDSA) and Chevron Corp. (CVX) from mulling bids for Nexen, according to
Prospector Partners Asset Management LLC. Buyers would be drawn
to Nexen’s assets that span the Gulf of Mexico, the U.K.’s North
Sea and Canada’s oil sands, said Aston Hill Financial Inc. (AHF)

“I still like the chances for both the Nexen deal and the
Progress deal,” Sam La Bell, a Toronto-based analyst for
Veritas, said in a telephone interview. “If you look at where
the oil growth is coming from around the world, there aren’t a
lot of jurisdictions that are as stable as Canada and as
attractive as Canada. If these deals are rejected and it has to
do with the national oil company structure, it puts the super
majors back in the driver’s seat” as acquirers.

Approval Expected

Cnooc said today it’s planning around the assumption that
the Nexen purchase will be approved. The Chinese oil explorer
expects the deal to be completed by year-end and is prepared for
all possible outcomes, Chief Financial Officer Zhong Hua said on
a conference call today.

Peter Hunt, a Cnooc spokesman, said in an e-mail yesterday
that “our regulatory application is proceeding as normal.”

Canada blocked Petroliam Nasional Bhd.’s C$5.2 billion
($5.24 billion) purchase of Progress Energy (PRQ) on Oct. 19, saying
it wasn’t convinced that the bid by the Kuala Lumpur-based
company, known as Petronas, was in its national interests.

“I am not satisfied that the proposed investment is likely
to be of net benefit to Canada,” Industry Minister Christian Paradis said in a statement. Petronas has 30 days to appeal or
provide additional concessions, at which point the government
will make a final decision, Paradis said.

Slumping Stocks

Progress Energy’s shares dropped by the most in more than
three years on Oct. 22, the first trading day after the
rejection, and the stock was at C$18.98 as of yesterday, 14
percent below Petronas’s C$22 offer price.

Shares of Nexen, which also needs to win government
approval of its takeover by China’s state-owned oil producer,
also slumped, falling 6.7 percent this week through yesterday.

Nexen’s U.S.-listed shares ended yesterday at $23.71 a
share, 14 percent below Cnooc’s $27.50-a-share bid. That’s the
widest gap since the deal was announced on July 23, data
compiled by Bloomberg show.

Not Dead

“Markets hate uncertainty, and the uncertainty regulators
have added to the equation is due to the decision on the
Progress deal,” Robert Gill, a Toronto-based money manager at
Aston Hill, which oversees about C$6 billion including Nexen
shares, said in a phone interview. Nexen’s stock declined on the
view that it “can’t be worth the same value the day after the
regulators’ decision on Progress as it was the day before.”

The Canadian government’s decision was more of an extension
of the Progress Energy review period than an outright rejection
of the deal, according to Veritas’s La Bell, who said the news
also doesn’t change the potential for Cnooc to obtain approval
for its Nexen purchase.

“This is not a refusal” of the Progress Energy takeover,
he said. The plunge in Nexen’s stock was “a bit of an
overreaction by the market. The deal isn’t dead.”

David Taylor, president and chief investment officer
overseeing $640 million at Taylor Asset Management in Toronto,
also said both deals are still likely to clear government
hurdles. He said he took advantage of the drop in Nexen’s share
price this week to add to his stake in the company.

‘National Priority’

“I don’t think anything has changed,” said Taylor, who
also helps run the IA Clarington Focused Canadian Equity Class
fund. “The body language from the prime minister is that we
desperately need foreign capital to help develop our plays.”

Prime Minister Stephen Harper has called it a “national
priority” to sell more natural resources to Asia, and Natural
Resources Minister Joe Oliver said on Sept. 4 that Canada needs
an “immense” amount of capital to develop its oil and gas.

Current proposed projects in Canada’s oil sands require
investments of C$220 billion, the Canadian Energy Research
Institute said in a March report.

Nexen, which was formed when Occidental Petroleum Corp.
combined its Canadian units into one company in 1971, gives a
buyer access to Canada’s vast oil deposits, offshore production
in the U.K.’s North Sea, West Africa and the Gulf of Mexico and
drilling opportunities in shale-rock formations. It produced
213,000 barrels of oil equivalent per day in the second quarter.

China Focus

“Canada has the resources and needs money,” Richard Howard, co-manager of the Prospector Capital Appreciation Fund (PCAFX)
at Prospector Partners, which oversees about $2.5 billion, said
in a phone interview from Guilford, Connecticut. Nexen is among
the fund’s top five holdings. “I’m pretty optimistic” that the
deal gets done, he said.

Canada plans to ask China to allow several transactions in
exchange for approval of the Nexen takeover, underscoring that
reciprocity will be part of foreign investment policies Harper’s
government will release soon, according to a person with
knowledge of the matter, who spoke this week on the condition of
anonymity because the discussions aren’t public.

The prime minister has “focused on China as Canada’s next
energy market,” Aston Hill’s Gill said. “So I think this is a
real consideration for him and it will help to guide his
thinking on Cnooc and Nexen more so than how regulators will
deal with Petronas and Progress.”

Midnight ‘Pumpkin’

Still, betting on either deal is risky, according to Sachin Shah, a merger arbitrage strategist at Tullett Prebon Plc in
Jersey City, New Jersey. The Canadian government made it harder
to predict its actions when it caught traders off guard by
rejecting Petronas’s deal for Progress Energy, he said. The
statement from the Minister of Industry was released just before
midnight in Toronto on Oct. 19.

“Around the stroke of midnight, the Progress-Petronas deal
turned into a pumpkin,” Shah said in a phone interview. “Now
we have to find out if Progress stays a pumpkin or goes back to
being the beautiful deal that it is.”

For that reason, it’s “premature” to bet that Nexen’s
takeover by Cnooc will win approval, he said. “I want to say
that they should approve the Nexen deal, but you ultimately have
to wait for Progress.”

Before the Cnooc deal was announced, Nexen shares were
trading at $17.06.

Should the government block Cnooc’s bid, Prospector
Partners’s Howard said a multinational oil company such as
Shell (RDSA), Chevron or Exxon Mobil Corp. (XOM) could set its sights on
Nexen.

Unocal Deal

Such a move isn’t unprecedented, he said, referring to the
bidding war for Unocal Corp. in 2005. Cnooc was forced to
abandon a $19 billion hostile bid for El Segundo, California-
based Unocal as U.S. lawmakers proposed legislation to block it,
leaving San Ramon, California-based Chevron as the winning
bidder.

Spokesmen for Chevron, The Hague-based Shell and Irving,
Texas-based Exxon declined to comment on whether the companies
would consider bidding for Nexen.

“It has some pretty attractive assets,” Aston Hill’s Gill
said. “Should the deal with Cnooc not be allowed to pass, it’s
possible that another company would step up and be a suitor.”

Still, “I wouldn’t count out the Cnooc deal yet at this
stage,” he said.